Karen Kissane, London

The Murdoch-owned company News International seriously failed in corporate governance over phone-hacking and James Murdoch's account of a key event was less credible than that of an executive who told a different story, the Leveson inquiry has found.

In a 2000-page report on press ethics released overnight, Lord Justice Leveson also said that:

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• Police made poor decisions in not pursuing phone-hacking but were not driven by fear of, or relationships with, News International executives.

Justice Leveson found that News International and its parent company News Corp had failed to investigate evidence that phone-hacking was widespread among journalists at the News of the World.

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"There was serious failure of governance within the News of the World. Given criminal investigation and what are now the impending prosecutions, it is simply not possible to go further at this stage," he said.

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"What can be said is that there was a failure on the part of the management at the News of the World to drill down into the facts to answer the myriad of questions that could have been asked and which could be encompassed by the all-embracing question ... 'What the hell was going on?'"

The way the company clung to the line that hacking had been confined to "one rogue reporter", in the face of outside investigations and doubts by its own senior executives, was "extraordinary" and said a great deal about the paper's approach to ethics, the report said.

Justice Leveson found that evidence was unclear as to what NI's then-executive chairman, James Murdoch, knew of hacking allegations.

Mr Murdoch had been sent an email chain in which a hacking victim alleged that illegal practices were "rife within the organisation". Mr Murdoch told the inquiry he had not read all the email chain and was unaware of this claim.

Justice Leveson concluded: "James Murdoch replied to the email within two minutes of receiving it. The speed and content of his reply appear to support his claim not to have focused on the key allegation."

Mr Murdoch had also said he was never shown or told the significance of a different email, headed "for Neville", that was also evidence that hacking was more widespread. In contrast, News International's then-legal chief, Tom Crone, told the inquiry the significance of this email had been made clear to James Murdoch at a meeting on June 10, 2008.

Justice Leveson said he concluded "that Mr Crone's version of events ... should be preferred to that of Mr Murdoch. There are aspects of the account of Mr Murdoch that cause me some concern: in particular, it is surprising if the gist [of a lawyer's opinion that there was evidence hacking was widespread] was not communicated to him. Furthermore, [editor Colin] Myler and Mr Crone had no reason or motive to conceal relevant facts, as borne out by [Mr Myler] sending James Murdoch the [earlier] chain of emails containing the 'bad news'."

Rupert Murdoch had told the inquiry that senior management at News International covered up the truth: "[We were] all misinformed and shielded from anything that was going on there ... there's no question in my mind that maybe even the editor, but certainly beyond that, someone took charge of a cover-up that we were victim to."

Justice Leveson said if there had been such a cover-up, "then the accountability and governance systems at News International would have to be considered to have broken down in an extremely serious respect. If James Murdoch was not the victim of an internal cover-up, then the same criticism can be made of him as of Mr Myler and Mr Crone in respect of the failure to take action".

Justice Leveson also criticised Rupert Murdoch and News International's parent company, News Corporation: "Although there is no evidence from which I could safely infer that Rupert Murdoch was aware of a wider problem, it does not appear that he followed up (or arranged for his son to follow up) on the brief [he said he had given] Mr Myler 'to find out what the hell was going on'...

"If News Corporation management, and in particular Rupert Murdoch, were aware of these allegations, it is obvious that action should have been taken to investigate them. If News Corporation were not aware of the allegations, which ... have cost the corporation many hundreds of millions of pounds, then there would appear to have been a significant failure in corporate governance."

The report also criticised politicians' close relationships with publishers including Rupert Murdoch. It said his denials that he had ever made express deals with any prime minister "were not the end of the story".

It concluded that politicians, just like Mr Murdoch's editors, tacitly understood "the basic ground-rules" of dealing with him: "Politicians knew that the prize was personal and political support in his mass-circulation newspapers .... [They] were well aware that 'taking on' Mr Murdoch would be likely to lead to a rupture in support, a metaphorical declaration of war on his titles, with the inevitable backlash that would follow."

But the report said Mr Murdoch's influence was more about what did not happen than about what did. Examination of policies did not reveal any that showed politicians compromised to favour Mr Murdoch's interests directly, "but no government addressed the issue of press regulation, nor of concentration of ownership".

Justice Leveson found that politicians had spent too much time cultivating relationships with the press and had failed to be transparent and accountable to the public over it. While he did not suggest any "deals" contrary to the public interest had been made, he said, "potential threats and promises hang in the air".

He also found that two generations of failure to deal with press misconduct was due to "the press and the politicians [having] formed too close a relationship".

Prime Minister David Cameron rejected the report's central recommendation for legislation to set up an independent body to regulate the press. He warned this would result in undue limits on freedom of speech.

But he also said the status quo was unacceptable and that the British press would have a limited amount of time to set up an appropriate watchdog.

Opposition Leader Ed Miliband backed the Leveson proposals for new laws and so did deputy Prime Minister Nick Clegg.

Justice Leveson also recommended legal protection for freedom of the press; increased damages for people who win media cases over wrongs such as libel or invasion of privacy; a system to protect media plurality; and rules to encourage politicians to reveal meetings with editors and publishers.